Q3FY24 Review: Larsen & Toubro: Consolidation likely before the next leap

31 Jan 2024 , 11:40 AM

Larsen & Toubro (L&T) continued its feat with International order wins led robust year-to-date inflow growth of 65% (₹1,834 Billion, up 7% over FY23). While this ensures strong revenue visibility for FY26, uncertainties and challenges in execution in H1 CY24 leading up to the General Elections in 2024 will moderate growth momentum with visible delay in the operating margin recovery trail. 

Conversion of ICDs to equity in Hyderabad metro alongside TOD monetization and receipt of TS government subsidy (year-to-date ₹9 Billion) brings the asset steps closer to on-boarding an external equity partner in FY25. Capex in Data centers (60MW capacity – ₹20 Billion), Electrolysers (₹5-6 Billion) and Semicon designing (₹8 Billion including back-fill talent acquisitions) will step up in FY25-26.

Although fundamentally L&T seems to be on a stronger footing with robust order book of ₹4,698 Billion (3.1x TTM sales), 16-17% NWC intensity, 15%+ RoEs (TTM RoCE of 22%), ease in concerns pertaining to Hyderabad Metro, etc., valuations at 26x FY26 estimated core EPS of ₹97.4 leave little headroom for upside in the near term. Analysts at IIFL Securities have downgraded their recommendation to Add from Buy with a revised 12M SoTP based target price of ₹3,841 (6% implied return).